MBFS Notes – Module 1

MBFS -Module Outline

Bank and Banking -Permissible banking activities

Types of banks in India

Role of RBI as a regulator- Banker and customer

Types of relationship between bank and customer

Bank`s obligation to customers - Types of accounts and customers

Types of lending-charging of securities

Banks and technology- Various IT products and services International banking services

Bank & Banking

Derived from the Italian word banca meaning 'bench', the table at which a dealer in money worked.

What is a bank?

A bank is now a financial institution which offers savings and cheque accounts, makes loans and
provides other financial services, making profits mainly from the difference between interest paid on
deposits and charged for loans, plus fees for accepting bills and other services.

Sec 5 ( b) of Banking Regulation Act of India, 1949 defines Banking as "accepting, for the purpose of
lending or investment of deposits of money from the public, repayable on demand or otherwise and
withdrawable by cheques, draft, order or otherwise."

According to Sec. 2 of the Bill of Exchange Act, 1882, ‘banker includes a body of persons, whether
incorporated or not who carry on the business of banking.’

Customer

It is generally believed that any individual or an organisation, which conducts banking transactions with
a bank, is the customer of bank.

Types of customers

 Existing customers
 Potential customers
 Former customers
 Those who avail facilities of banks

Customers can be classified further as

  Individuals
 Partnership firms
 Married woman
 Minor
 Companies
 Trusts

Permissable activities

The law governing Banking Activities in India is called "Negotiable Instruments Act 1881".

The banking activities can be classified as :

1. Accepting Deposits from public/others

2.Lending money to public (Loans)
3.Transferring money from one place to another (Remittances)
4.Acting as trustees
5..Keeping valuables in safe custody
6..Collection Business
7.Government business

1.Accepting Deposits from public/others

Banks are also called custodians of public money. Basically, the money is accepted as deposit for safe
keeping. But since the Banks use this money to earn interest from people who need money, Banks share
a part of this interest with the depositors. The quantum of interest depends upon the tenor - length of
time for which the depositor wishes to keep the money with the Bank - and the ease of withdrawal. The
thumb rule is, longer the tenor, higher the rate of interest and lesser the restrictions on withdrawal,
lesser the interest. Exceptions, however, exist. Deposits are accepted from both resident (domestic) or
non-resident Indian customers.

2.Lending money to public (Loans)

Banks give different types of loans

Charge interest on the loans

Interest rate depends on the type of loan & nature of the security offered by the customer.

They look for 5 Cs- Capacity, capital, collateral, credit, and character

3.Remittance Business

Apart from accepting deposits and lending money, Banks also carry out, on behalf of their customers the
act of transfer of money - both domestic and foreign.- from one place to another. This activity is known
as "remittance business" .
Banks issue Demand Drafts, Banker's Cheques, Pay Orders etc. for transferring the money. Banks also
have the facility of quick transfer of money also know as Telegraphic Transfer or Tele Cash Orders.

4.Trustees

Banks also act as trustees for various requirements of the corporates, Government and General Public.

For example, whenever a company wishes to issue secured debentures, it has to appoint a financial
intermediary as trustee who takes charge of the security for the debenture and looks after the interests
of the debenture holders.

For general public also the Banks normally have a facility called "safe custody" where Banks act as
trustees.

5.Keeping valuables in safe custody

Lockers

Bankers are in the business of providing security to the money and valuables of the general public.
While security of money is taken care of through offering various type of deposit schemes, security of
valuables is provided through making secured space available to general public for keeping these
valuables. These spaces are available in the shape of LOCKERS. The latter are small compartments with
dual locking facility built into strong, fire and burglar resistant cupboards. These are stored in the Bank's
Strong Room and are fully secure. Lockers can neither be opened by the hirer or the Bank individually.
Both must come together and use their respective keys to open the locker.

6.Collection Business

Apart from transferring money from one place to another, Banks are also in the business of "collecting"
customers money from other places.

Types of Banks in In India

The commercial banking structure in India consists of

1. Scheduled Commercial Banks in India

2. Unscheduled Banks in India

Scheduled Banks in India constitute those banks which have been included in the Second Schedule of
Reserve Bank of India(RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy
the criteria laid down vide section 42 (6) (a) of the Act.

1.Public Sector Banks

 State Bank of India and its associate banks called the State Bank Group
 19 nationalized banks
 Regional rural banks mainly sponsored by public sector banks

Ex for Regional rural banks-Karnataka Vikas Grameena Bank,,Pragathi Gramin Bank

Cauvery Kalpatharu Grameena Bank, Krishna Grameena Bank

2.Private Sector Banks

 Old generation private banks

 New generation private banks
 Foreign banks operating in India
 Scheduled co-operative banks

New generation privates sector banks

ING Vysya Bank Ltd ,Axis Bank Ltd ,Indusind Bank Ltd ,,ICICI Bank Ltd ,HDFC Bank Ltd ,Centurion Bank Ltd

Old private sector banks

Jammu & Kashmir Bank Ltd. South Indian Bank ,

Foreign banks

American Express Bank Ltd.,* ANZ Gridlays Bank Plc.* Bank of Tokyo Ltd.* Banquc Nationale de Paris
* Barclays Bank Plc* Citi Bank N.C.* Deutsche Bank A.G.

Co-operative Sector

The Co-operative banks has a history of almost 100 years. Their role in rural financing continues to be
important even today, and their business in the urban areas also has increased phenomenally in recent
years mainly due to the sharp increase in the number of primary co-operative banks.

The co-operative sector is very much useful for rural people. The co-operative banking sector is divided
into the following categories.

 State co-operative Banks

 Central co-operative banks
 Primary Agriculture Credit Societies

Functioning

Co-operative banks in rural areas mainly finance agricultural based activities including farming, cattle,
milk, personal finance,small scale industries and self-employment driven activities,

The co-operative banks in urban areas mainly finance various categories of people for self-employment,
industries, small scale units, home finance, consumer finance, personal finance, etc

Non scheduled banks

Non-scheduled bank in India" means a banking company as defined in clause (c) of section 5 of the
Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank".

Types of relation between banker and customer

Trust based relationship, fiducial relationship

Depends on type of transaction

Relationship is contractual & based on certain conditions.

Relationship confers certain rights & obligations

Types of relationship

1. General relationship

2. Special relationship

General relationship

Relation arises out of 2 functions of banks

1.Accepting deposits 2. Lending

Debtor-creditor ( Incase of deposit accounts)

Creditor- debtor ( Incase of loan accounts)

Special relationship

 Trustee
 Bailor-bailee
 Lessor- lessee
 Agent- principal
 Custodian

Trustee

In case of trust banker customer relationship is a special contract.

When a person entrusts valuable items with another person with an intention that such items would be
returned on demand to the keeper the relationship becomes of a trustee and trustier. Customers keep
certain valuables or securities with the bank for safekeeping or deposits certain money for a specific
purpose (Escrow accounts) the banker in such cases acts as a trustee. Banks charge fee for safekeeping
valuables

2. Bailee – Bailor:
Banks secure their advances by obtaining tangible securities. In some cases physical possession of
securities goods (Pledge), valuables, bonds etc., are taken. While taking physical possession of securities
the bank becomes bailee and the customer bailor. Banks also keeps articles, valuables, securities etc., of
its customers in Safe Custody and acts as a Bailee. As a bailee the bank is required to take care of the
goods bailed

3. Lessor-lessee

Providing safe deposit lockers is as an ancillary service provided by banks to customers. While providing
Safe Deposit Vault/locker facility to their customers bank enters into an agreement with the customer.
The agreement is known as “Memorandum of letting” and attracts stamp duty.
The relationship between the bank and the customer is that of lessor and lessee.

Banks lease (hire lockers to their customers) their immovable property to the customer and give them
the right to enjoy such property during the specified period i.e. during the office/ banking hours and
charge rentals. Bank has the right to break-open the locker in case the locker holder defaults in payment
of rent. Banks do not assume any liability or responsibility in case of any damage to the contents kept in
the locker. Banks do not insure the contents kept in the lockers by customers.

4.Agent- principal

Banks collect cheques, bills, and makes payment to various authorities viz., rent, telephone bills,
insurance premium etc., on behalf of customers.

Banks also abides by the standing instructions given by its customers. In all such cases bank acts as an
agent of its customer, and charges for theses service

5. As a Custodian: A custodian is a person who acts as a caretaker of some thing. Banks take legal
responsibility for a customer’s securities. While opening a dmat account bank becomes a custodian

Duties of a banker

1. Duty to maintain secrecy/confidentiality of customers' accounts.

2. to honour cheques drawn by customers on their accounts and collect cheque,bills on his behalf.
3. to pay bills etc., as per standing instructions of the customer.
4. to provide proper services.
5.to act as per the directions given by the customer..
6. to submit periodical statements i.e. informing customers of the state of the account
7.Articles/items kept should not be released to a third party without due
authorization by the customer

Circumstances under which banker can disclose information of customer's account

A bank can disclose information regarding customer's account to a person(s) under the following
circumstances.
(a)Under compulsion of law.
(b)Under banking practices.
(c)For protecting national interest.
(d)For protecting bank’s own interest
(e)Under express or implied consent of the customer

Types of Accounts- Deposit accounts and loan accounts

Types of deposits

 Current account
 Savings accounts
 Fixed deposit accounts
 Recurring deposit accounts
Types of loans

 Cash credit Account

 Overdraft
 Direct advances/loans
 Term loans
 Bill discounting

Cash credit Account

This account is the primary method in which Banks lend money against the security of commodities and
debt. It runs like a current account except that the money that can be withdrawn from this account is
not restricted to the amount deposited in the account. Instead, the account holder is permitted to
withdraw a certain sum called "limit" or "credit facility" in excess of the amount deposited in the
account.Cash Credits are, in theory, payable on demand. These are, therefore, counter part of demand
deposits of the Bank.

Current Account

The word overdraft means the act of overdrawing from a Bank account. In other words, the account
holder withdraws more money from a Bank Account than has been deposited in it.

Charging of securities

 Lien- Right to retain

 Hypothecation
 Mortgage
 Pledge

Hypothecation

Deliver of documents or evidence of title to goods Ex. Bill of lading

No physical possession of goods

Vehicle loans

Pledge

a pledge is used to refer to a security interest in movable property, with an important feature of
possession by the pledgee (lender).

Banker has the power of sale in case of default by the borrower

Ex.Pledging of shares

Mortgage

It is the security interest in immovable property. Mortgager has an implied power of sale
Ex. Mortgage of property in case of housing loans

Banks and technology

Traditional banking in India accounts for more than 70%

Computerisation of the banking operations has made maximum impact on

 Internal accounting systems

 Customer service
 Diversification of business

Objectives for propagating IT tools in banks

 To provide better customer service

 To improve efficiency & profitability in banks
 To have efficiency in accounting system

Various IT products and services

 ATMs
 Mobile banking
 Tele banking
 Internet banking
 EFT
 ECS
 Plactic cards
 Core banking
 ATMs

Growth of ATMs and sharing of ATMs- led to interbranch & interbank networking

Works on the principle of ATM cards & PIN

24/7 service- Quick & efficient service

User friendly system. Machine dedicated to do certain jobs. Menu driven

Advantages of ATMs

 Has incresed banking hours

 Convenient to customers
 Cash withdrawals for large amount are not permitted

Basic functions of ATMs

 Deposit of cash
 Generate statements
 Account balance enquiry
 Request for cheque book
  Utility functions like payment of bills

Mobile banking

It is a bank on wheels which reaches the doors of the customer.

They are an alternative to brick & mortar bank and Click & mortar banks

Reduction in cost.

Area coverage is larger.Can access remionote locations. Better staff time utilisation

Can have personal contact ith the customers .It depends on wireless technology for data
communication.

Mobile ATMs

Extension of mobile service

ATMs on roads, ships, Airlines

ATMs can recognise different currencies.

Specially useful for international travellers

Credit cards can be used in ATMs.

Tele Banking

It allows the customer to use STD lines and establish contact with bank and obtain services anywhere
and any time during banking hours.

Customers will have an additional facility of using a special telephone number for certain types of
transactions.

Ex. Request for cheque books., Transfer of funds, drafts, TTs etc, balance enquiry.

Internet Banking

Banking from home through internet

Permits the customer to log on to the banking system for certain functions.

Customers should have s PC, Broad band connection.

Can access the bank round the clock and down load the information .

Verification is also possible

Services:Request for cheque books., Transfer of funds, drafts, TTs etc, balance enquiry

Electronic fund management

In 1990- Introduction of mechanised clearing facility through MICR technology. This led to faster and
safer clearing through networking in banks.

MICR cheques are used in this system.

1995- ECS ( electronic clearing settlement) & EFT ( Electronic fund transfer)- Faster movement of funds
across agencies and banks and places

RTGS( Real time gross settlement)-Online settlement of interbank funds

INFINET- A communication network for faster funds & information flows

Online accounting system( OLTAS)- electronic transmission of tax related information from banks to tax
information network ( TIN) of income tax department

Plastic money

Growth of Maser card & Smart card- reducing the need for money & cost of currency management